HETERODOX APPROACH
V. The Implications for Policy and Conclusions The main practical conclusions are the following
The expansion of financial markets in the transition economies must be always controlled and governed by the State. First of all, the State should both create serious institutional barriers to entry of insolvent and fraudulent companies into the financial markets and to exit of such companies from these markets. Paradoxically, “fierce”
competition in the financial markets in the beginning of the transition is harmful for economic welfare. This paradox is explained by various informational problems described above. The State should provide very imperfectly financial market structures in the transition economies by
“throwing away” insolvent and fraudulent suppliers of financial assets. The right to issue stocks, shares, bonds and other financial assets must not be universal and should be given only to companies satisfying certain financial and legal requirements (as it takes place in the developed countries). Furthermore, the State should prevent free exit (from markets) potential bankrupts and financial swindlers.
The State must legally both punish such swindlers and protect ordinary financial investors. Very often this protection should be provided in the framework of standard enforcement of contracts by the State because all debt securities, for examples, bonds, are debt contracts. The State should also protect demanders for financial assets from aggressive advertisement. The last kind of protection is effective means of correction of portfolio choices in the conditions of complexity and uncertainty. Without analyzed legal and financial constraints development of financial markets cannot be “genuine” from the perspective of financing huge fixed capital investment and rapid growth.
Possibly, one of such constraints could be high securities transaction excise tax which was a practice of some developed countries (Pollin, 1999).
Secondly, the State should help people to learn basic skills of portfolio choice. As I mentioned above, the planned economy is an economy without financial markets, and “socialist people” have no any “financial skills”. Therefore, “transitional people” also have no these
skills, at least, in the beginning of the transition. The State should take the responsibility of “financial enlightenment”
of ordinary representatives of civilians. Such enlightenment could be provided through the government mass media. These reasonings also regard to elementary
“legal skills” such as knowledge of rights of stockholder.
Naturally, relevant skills can be acquired without any government policies through the process of “learning-by- doing”. It is a way of the majority of transition economies.
But such way seems ineffective, because it is concerned with great financial losses of ordinary financial investors and, especially, with continuation of human aversion of securities of private issues. When distrust takes place, financial markets cannot provide “finance” (Keynes, 1937) for the productive sector, and investment process can stop together with economic growth.
The State can help also ordinary people by means of development of brokers and investment advisers institutions. The presented analysis shows the importance of these institutions for financial markets stability.
All this reasoning implies critique of the big bang policy from the perspective of securities markets dynamics. As is well known, the essence of this policy is quickest destruction of institutions of the planned system and simultaneous realization of all reforms providing rise of the market system.
It is the big bang that main cause of both sharpening of the informational problems (Rozmainsky, 2000) — complexity and uncertainty — and heavy macroeconomic slump, including liquidity crisis. As the above analysis has showed these factors together with some elements of the “socialist past” had formed specific behavioral patterns of suppliers and demanders in these markets which allowed expansion of financial markets to deep transformational recession and to increase social cost in the form of big losses of many ordinary portfolio-decision-makers.
More concretely, such patterns — to a considerable extent created by the big bang — generates the threat of the domination of financial papers of insolvent, illiquid and fraudulent issuers in the financial markets. And then, the majority of participants of financial markets can loose money invested in the assets of such “bad” companies. It leads to human distrust to the financial markets. People begin to escape from investing into the financial assets of private firms and to hold wealth in the form of cash money and/or foreign exchange. The “dynamic paradox of transitional portfolio choice” takes place. As a result, the financial system has become degraded; and its development has been stopped. The economy as a whole loses capability for financing investment and growth. Such dynamics took place in some transition economies, for example, in the Albanian and Russian economies in the 1990s.
Financial market should emerge only when law framework for a market economy, in general, and laws regulated financial transactions, in particular, have been created. There must be strict enforcement of obligations,
I. V. Rozmainsky fast legal procedures and also consistent and non-
contradictory legislation. Such features had been absent in many transition economies (Lah and Sušjan, 1999, p. 592).
In general, spontaneous expansion of financial markets in the course of transition is harmful for the real sector.
Such expansion harms real economy through some combinations of (described in the Heterodox economics)
“crowding-out”, “casino”, “short-termism” effects and also specific “fraudulent” form of “financial instability” effect.
These markets should emerge only when some important institutions of market economy have been already created.
Moreover, financial markets should be variously regulated by the State through financial and legal controls. Otherwise such markets cannot fulfill their main (from the Heterodox point of view) function of financing physical investment and economic growth. These are the lessons from the 1990s.
References
1. Binswanger, M. 1999a. The co-evolution between the real and financial sectors: the optimistic “New Growth Theory View” versus the pessimistic “Keynesian View”, Diskussionspapier Nr. 99-01 an der Fachhochschule Solothurn / Nordwestschweiz in Olten.
2. Binswanger, M. 1999b. Speculative bubbles instead of inflation: new dimensions in the co-evolution between real and financial markets since the 1979-1982 recession, http://eaepe.tuwien.ac.at/papers99/binswanger.doc.
3. Boyd, I. and Blatt, J. M. 1988. Investment Confidence and Business Cycles, Berlin, Springer Verlag.
4. Carvalho, F.J.C. 1992. Mr. Keynes and the Post Keynesians. Principles of Macroeconomics for a Monetary Production Economy, Aldershot, Edward Elgar.
5. Davidson, P. 1972. Money and the Real World, London, Macmillan. 6. Davidson, P. 1996. Reality and economic theory, Journal of Post Keynesian Economics, vol. 18, no. 4, Summer, 479—508. 7. Dequech, D. 1999.
On some arguments for the rationality of conventional behavior under uncertainty: concepts, applicability and criticisms, http://www.eco.unicamp.br/publicacoes/
textos/download/texto80.pdf. 8. Dequech, D. 2000a.
Asset choice, liquidity preference and rationality under uncertainty, Journal of Economic Issues, vol. 34, no. 1, March, 159—176. 9. Dequech, D. 2000b. Fundamental uncertainty and ambiguity, Eastern Economic Journal, vol. 26, no. 1, Winter, 41—60. 10. Dequech, D. 2000c.
Bounded rationality, institutions and uncertainty, http://
www.anpec.org.br/encontro2000/artigos/art-208.pdf.
11. Dickerson, A.P., Gibson, H. D. and Tsakalatos, E. 1995. Short-termism and underinvestment: the influence of financial systems, Manchester School, vol.
LXIII, no. 4, December, 351—367. 12. Dymski, G. and Pollin, R. (eds.) 1994. New Perspectives in Monetary Macroeconomics: Explorations in the Traditions of Hyman P. Minsky. Ann Arbor, University of Michigan Press.
13. Ees, H. van and Garretsen, H. 1993. Financial
markets and the complementarity of asymmetric information and fundamental uncertainty, Journal of Post Keynesian Economics, vol. 16, no. 1, Fall, 37—48.
14. Fazzari, S. and Papadimitrou, D. (eds.) 1992.
Finance Conditions and Macroeconomic Performance.
Essays in Honor of Hyman P. Minsky. Armonk: M. E.
Sharpe. 15. Herr, H. and Westphal, A. 1991. Economic coherence and the transformation of planned economies into monetary economies, Journal of Post Keynesian Economics, vol. 13, no. 3, Summer, 307—327.
16. Hodgson, G.M. 1997. The ubiquity of habits and rules, Cambridge Journal of Economics, vol.21, 663—
684. 17. Juniper, J. 2000. A genealogy of short-termism in capital markets, http://business.unisa.edu.au/cobar/
workingpapers/cobar/2000-03.pdf. 18. Keynes, J. M.
1930. A Treatise on Money, London, Macmillan.
19. Keynes, J. M. 1936. The General Theory of Employment, Interest and Money, London, Macmillan.
20. Keynes, J. M. 1937. The “ex-ante” theory of the rate of interest, Economic Journal, December, 663—669.
21. Kornai, J. 1980. Economics of Shortage, Amsterdam, North-Holland. 22. Kornai, J. 1993.
Transformation recession, Collegium Budapest/Institute for Advanced Studies. Discussion Papers N 1, June.
23. Kornai, J. 1995. Highway and Byways. Studies on Reform and Post-Communist Transition, Cambridge (Mass.), MIT Press. 24. Kozul-Wright, R. and Rayment, P. 1997. The institutional hiatus in economies in transition and its policy consequences, Cambridge Journal of Economics, vol. 21, 641—661. 24. Kregel, J. 1995. A financial structure for developing market mechanisms in Eastern Europe, pp. 168-179, in Arestis, P. and Chick, V. (eds.) Finance, Development and Structural Change, Aldershot, Edward Elgar. 26. Lah, M. and Sušjan, A. 1999. Rationality of transitional consumers: a Post Keynesian view, Journal of Post Keynesian Economics, vol. 21, no. 4, Summer, 589—
602. 27. Lavoie, M. 1994. A Post Keynesian approach to consumer choice, Journal of Post Keynesian Economics, vol. 16, no. 4, 539—562. 28. Leibenstein, H. 1976. Beyond Economic Man. A New Foundation for Microeconomics, London, Harvard University Press.
29. Minsky, H. P. 1977. The financial instability hypothesis: an interpretation of Keynes and an alternative to «standard» theory, Nebraska Journal of Economics and Business, vol. 16, Winter, 5—16. 30. Minsky, H.P.
1985. The financial instability hypothesis: a restatement, pp. 24-55, in Arestis, P. and Skouras, T. (eds.), Post- Keynesian Economic Theory: a Challenge to Neo Classical economics, Brighton: Wheatsheaf. 31. Minsky, H.P.
1986. Stabilizing an Unstable Economy, London, Yale University Press. 32. Parenteau, R. W. 1999. Irrational exuberance: a Minsky model of financial instability with an equity market and adaptive expectation behavior, p. 52, in Proceedings of the 9th Annual Hyman P. Minsky
Conference on Financial Structure. Structure, Instability and the World Economy: Reflections on the Economics of Hyman P. Minsky, April, 21-23, NewYork, The Jerome Levy Economics Institute of Bard College. 33. Pollin, R.
1999. Securities transactions tax for U. S. financial markets, pp. 44-45, in Proceedings of the 9th Annual Hyman P. Minsky Conference on Financial Structure.
Structure, Instability and the World Economy: Reflections on the Economics of Hyman P. Minsky, April, 21-23, New York, The Jerome Levy Economics Institute of Bard College. 34. Raines, J. P. and Leathers, C. G. 1996.
Veblenian stock markets and the efficient markets hypothesis, Journal of Post Keynesian Economics, vol.
19, no. 1, Fall, 137—151. 35. Raines, J. P. and Leathers, C. G. 2000. Economists and the Stock Market:
Speculative Theories of Stock Market Fluctuations, Cheltenham, Edward Elgar. 36. Rozmainsky, I. V. 1997.
“Reverse gradualism”, investment collapse and financial degradation in Russia, http://ie.boom.ru/Rozmainsky/
Gradual.htm. 37. Rozmainsky, I. V. 2000. The Big-Bang strategy and the problems of non-rational behavior in the transitional economy of Russia, http://ie.boom.ru/
Rozmainsky/essay.htm. 38. Sapir, J. 1999. Russia’s Crash of August 1998. diagnosis and prescription, Post- Soviet Affairs, vol. 15, no.1, 1—36. 39. Semmler, W.
(ed.). 1989. Financial Dynamics and Business Cycles:
New Perspectives, Armonk, M. E. Sharpe. 40. Simon, H. 1959. Theories of decision-making in economic and behavioral sciences, American Economic Review, vol.
49, 253—282. 41. Singh, A. 1995. The stock market, economic efficiency and industrial development, pp. 71- 112, in Arestis, P. and Chick, V. (eds.) Finance, Development and Structural Change, Aldershot, Edward Elgar. 42. Studart, R. 1995. Saving, financial markets and economic development: theory and lessons from Brazil, pp. 46-70 in Arestis, P. and Chick, V. (eds.), Finance, Development and Structural Change, Aldershot, Edward Elgar. 43. Tsang, S.-K. 1996. Against «Big-Bang»
in economic transition: normative and positive arguments, Cambridge Journal of Economics, Vol. 20, 183—193.
44. Veblen, T. 1904. The Theory of Business Enterprise, New York, Charles Scribner’s Sons. 45. Weber, M. 1965.
The Protestant Ethic and the Spirit of Capitalism, London, Allen and Unwin.
Rozmainsky Ivan V. Initial Dynamics of Financial Markets in the Transition Economies in the 1990s and New Critique of the Big Bang Policy:
Heterodox Approach
Heterodox — Post Keynesian and Institutionalist — economics proves that expansion of financial sector can be harmful for the real sector. Such conclusion is an effect of account of variability of preferences, planning horizons and degree of rationality in the behavior of economic agents. We suppose that both methodology
and conclusions of Heterodox Economics can be especially topical for many transition economies. The point is that fundamental features of the transitional economies affect the patterns of choice of agents in the financial markets. These patterns, in turn, lead to the adverse effects of the expansion of financial markets in such economies.
Key words: Financial Markets; Transitional Economies; Economics of Transition; Rationality;
Heterodox Economics.
Розмаїнський І. В. Початкова динаміка фінан- сових ринків в перехідних економіках 1990-х і нова критика політики великого вибуху: Неортодок- сальний Підхід
Неортодоксальна — посткейнсіанська та інститу- ціональна, — економіка доводить, що розширення фінансового сектора може бути шкідливим для реаль- ного сектора. Такий висновок: ефект урахування мінли- вості переваг, горизонтів планування та ступеня раціо- нальності в поведінці економічних агентів. Ми припус- каємо, що і методологія, і висновки неортодоксальної економіки можуть бути особливо актуальні для багать- ох перехідних економік. Річ у тім, що фундаментальні особливості перехідних економік впливають на схеми вибору агентів на фінансових ринках. Ці зразки, у свою чергу, приводять до несприятливих ефектів розширен- ня фінансових ринків в таких економіках.
Ключові слова: Фінансові Ринки; Перехідні Еко- номіки; Економіка Переходу; Раціональність; Неорто- доксальна Економіка.
Розмаинский И. В. Начальная динамика фи- нансовых рынков в переходных экономиках 1990-х и новая критика политики большого взрыва: Не- ортодоксальный Подход
Неортодоксальная — посткейнсианская и инсти- туциональная, — экономика доказывает, что расшире- ние финансового сектора может быть вредно для ре- ального сектора. Такое заключение — эффект учета изменчивости предпочтений, горизонтов планирования и степени рациональности в поведении экономических агентов. Мы предполагаем, что как методология, так и выводы неортодоксальной экономики могут быть осо- бенно актуальны для многих переходных экономик.
Дело в том, что фундаментальные особенности пере- ходных экономик воздействуют на схемы выбора аген- тов на финансовых рынках. Эти образцы, в свою оче- редь, приводят к неблагоприятным эффектам расши- рения финансовых рынков в таких экономиках.
Ключевые слова: Финансовые Рынки; Переход- ные Экономики; Экономика Перехода; Рациональность;
Неортодоксальная Экономика.
Received by the editors: 25.10.2010 and final form in 01.12.2010
V. І. Chоrnоdоn
Formulation of the problem. Combination of theoretical and methodological premises refers to a specific investigation of economic system, which is analyzed by stage of development, which will determine how the model is the solution of emerging problems concerning the development of economic systems.
Analysis of recent studies and publications. In the economic literature much attention is paid to the study of the category «economic development», the problem of growth and development has always been decisive in the activities of practitioners and theorists from the beginning of a new era. The study of development and economic growth was involved in the works of A. Smith, D. Ricardo, K. Marx, A. Marshall, J. Keynes, Joseph Schumpeter, Robert M. Solow, J. Hicks and others.
Further development relating to contemporary conditions is investigated in the works of V.A. Bosenko, V. Heyts, M. Zgurovsky, V. Zuev, V. Inozemtsev, A. Korotaev, I. Lukinova, B. Paskhaver, J. Pakhomov, G. Popov, A. Rogachev, E. Savelyeva, V. Sidenko, N. Sirenko, V. Senchahova, A. Chukhniy, S. George, S.V. Mochernuy, A. Galchinskuy, V. Semynozhenko. However, increased globalization processes and bundles of countries by level of development require further research to identify sources and factors of economic growth and development.
Methods. Theoretical and methodological basis of research is the dialectical method of knowledge and systematic approach to studying the issues of economic development, scientific works of domestic and foreign scientists. This work uses methods of abstract logic, historical comparison, etc.
Setting the task. The purpose of the work is to identify patterns of development of the economic system under modern conditions, to define what impact has a cyclic system of links and relations on the process of socio-economic factors.
The basic material work. The doctrine of the nature of the development was considered by G. Hegel. He used a dialectical method that provides the definition of a general law of nature and society, allocation of categories. G. Hegel determined that the development does not have a closed- loop, as occurs in a sequence from lower to higher forms, accompanied by a transition from quantitative to qualitative changes, and that the contradiction is the basis for development [1]. V.A. Bosenko defines it as a process of transition from quantitative to qualitative forms, which covers
the maximum possible range of the maximum possible facilities, the continuation of the movement cycle. It is important to ensure a system-integrated balance of all elements at different levels of hierarchy in the development process that will enable achievement of additional results from the development of the system, which is considered. The process of qualitative change is accompanied by a specific expression of the overall relationship of opposites, which are formed, and their incorporation into a new synthesis of new formations, which makes them more developed. Predestination, infinity and vastness of this statement in the process of identifying and resolving the opposites are the basis of trends for the inevitable narrowing of the infinite [2]. The development is a natural change for all kinds of matter and thinking, so it can be considered as the category of dialectics, the movement in the material world; the subject under study in philosophy; categories used in determining social and economic changes; the system changes of economics factors.
The development is a logical qualitative change of material and ideal objects which is characterized as a directed and irreversible process. Inverse changes are specific for the operation, i.e. a continuous loop playback system connections and relations in the absence of orientation changes can not accumulate to deprive the process characteristic of a single internal linkages;
discontinuity characterizes random changes. As a result, there is a new qualitative development of the facility. Present development is the development that is carried out in real time, which affects its direction [3].
The development is a universal property of matter, yet the general principle that serves as the basis for explaining the history of society and knowledge. In our opinion, the main principles of any kind are:
— legal provisions;
— information (reports of legislative rules for the manufacturer;
— insurance of effective functioning.
The development of some components in the system of the national economic complex is a complex contradictory process where positive and negative factors are interacting, and the period of progressive changes is the development occurring under the influence of several factors of political, economic, organizational and social nature. The development is a continuous process that provides the science, technical process, increased use of technology that allows production on an extended basis, УДК 339.327.7(477)
V. І. Chоrnоdоn, PhD (Economics), Vinnitsa Institute of Economics TNEU